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US earnings: as good as it gets
US earnings have had their best quarter since 2010, when they were bouncing back from the financial crisis.
US firms are enjoying rising sales and pricing power
(Image credit: Credit: Elizabeth Wake / Alamy Stock Photo)
US earnings have had their best quarter since 2010, when they were bouncing back from the financial crisis. The members of the S&P 500 index increased their earnings by just over 26% year-on-year in the first quarter of 2018, bolstered by the introduction of corporate tax cuts, a weaker dollar, and healthy worldwide growth (around half the index's sales are made outside the US).
Nonetheless, the first quarter will probably be "as good as it gets", says Justin Lahart in The Wall Street Journal. The impact of the tax cuts will gradually fade, and the dollar has strengthened too. The profit growth estimates for the next three quarters are around 20%, slowing to 6.5% in the first three months of 2019. Valuations are also already sky-high, so the scope for impressive profit growth to boost stocks looks limited.
One of the hallmarks of this cycle is historically stretched profit margins. But now we are seeing the highest percentage of firms raising wages and prices since the 1990s, says John Authers in the Financial Times. That doesn't mean margins must fall at once. Indeed, companies are growing sales, and growth bolsters pricing power, so firms will take the opportunity to widen margins. But again, the scope for profitability to provide equities with much further impetus is limited.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
As the impact of earnings fades, interest rates are becoming more important, says Lahart. That's not good news for stocks. The tight labour market and signs that "inflation is warming up" have driven the yield on the ten-year Treasury bond to just over 3%, a near-seven-year high. That increases the relative appeal of bonds compared with stocks and in the meantime, the danger of unexpectedly quick interest-rate rises as inflation jumps still lurks in the background.
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
